April of 2021, the Biden administration has introduced several tax laws that can dramatically impact the real estate business. The reason behind these tax changes is to make up for the devasting effects of the pandemic. The money is needed to fund the “American Jobs Plan” and infrastructure. These trillions of dollars have to be repaid for the economy to stay out of another great recession.
These proposed new tax laws directly have an impact on both commercial and residential real estate. For instance, long-term capital gains taxes are currently taxed at 20% plus an additional 3.8% tax on net investment income tax. Further, California imposes a 13.3% rate for income over $1 million to 39.6% from 37%. This elimination of the long-term capital gains taxes means that people residing in California can be exposed to a total tax of 56.7%. This tax applies to commercial, residential real estate, a sale of their business, and other assets.
The proposed tax increase is currently proposed to take effect on January 1, 2022. Some advocates of the prosed tax increases want the increases to take effect before 2022.
Also, the proposed changes are slated to eliminate the repeal of the 1031 Tax Deferred Exchanges for real estate. This proposal would cut off the ability to defer the tax implications again to a later date. If this tax provision is eliminated, the seller of the property could be taxed at 56+% in the higher tax brackets.
In the last few years, owners of income-producing properties have improved their properties by constructing tenant improvements. In the past, these improvements would have to be amortized over several years. A few years ago, the government wanted to provide owners a bonus depreciation method to depreciate all of the improvements in the year they occurred. This bonus put many people to work and provided a more attractive property. This provision may also be cut due to the proposed new tax laws.
Under the current tax laws, upon an individual’s death, a property would be fully assessed to current market values. This eliminates a potentially large tax debt to the heir. If this tax treatment is eliminated, it will force an undue burden of paying a tax debt at the time of the party’s debt. This could cause the heir to lose their property without the possibility of refinancing.
In conclusion, these proposed changes will potentially cause millions of workers to lose their jobs in the real estate business. Jobs could be lost to real estate agents, mortgage brokers, appraisers, construction workers, building supply companies, title company employees, lawyers, and accountants.
If you feel that these proposed changes may affect you personally, you should contact your State Senators and Congresspeople as soon as possible. It is easy to communicate with your representatives by email on their websites.
Now is the time to voice your opinion on these proposed measures!
*Thank you to Robert Briskin, Esq. for a well written review of these proposed changes in tax laws